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Steve Mnuchin: Goldman Sachs royalty and 'culture carrier'

Can you maybe almost feel a teeny tiny bit of pity for Steven Mnuchin, Trump’s pick as Treasury Secretary? The howls of rage have already started. Despite Trump’s tough-on-banks rhetoric, he picked a banker, and a former Goldman Sachs banker at that.

In a rare joint statement, Senators Elizabeth Warren [D-MA] and Bernie Sanders [I-VT] called the appointment “hypocrisy at its worst.” The choicest criticism came from Senator Sherrod Brown, who said that the pick of Mnuchin, instead of draining the Washington swamp, is “stocking it with alligators.”

It’s crystal clear that his confirmation hearing will not be a compliment-laden breeze!

Nor should it be. Mnuchin’s history makes it clear that we’ll have the proverbial fox guarding the hen house. (There are a lot of animals around here.) It’s also possible that a highly knowledgeable and intelligent fox who cares about the hens might be precisely what we need. But the real question about Mnuchin, even for those who have worked with him, is that there is, as of yet, no way to know what he actually stands for.

Goldman Sachs and “Ungodly Sums” of Money

As everyone knows now, Mnuchin is not just of Goldman, but of Goldman royalty. His father, Robert Mnuchin, was a pioneer in equity trading and a partner there in the 1960s. (The older Mnuchins divorced; Robert, who is now a prominent art dealer, and his second wife, Adriana owned the high end Mayflower Inn in Washington, CT for a period.) Steven went to Yale, where he was inducted into Skull and Bones and roomed with hedge fund luminary-to-be (and now chairman of Sears) Eddie Lampert.

Mnuchin began his career at a trainee at Salomon in the early 1980s before moving to Goldman in 1985. Someone who worked with him characterizes him as the sort of the person who was born on third base and thinks he hit a triple.

Billionaire and CEO of Sears Holdings Eddie Lampert

But Mnuchin also earned a reputation for being hard working and if not especially book smart, then street savvy. In the aftermath of the saving and loan crisis, when the government established the Resolution Trust Corporation (RTC) and, at least in the early days, money really did grow on trees for savvy Wall Streeters, Mnuchin and Goldman made “ungodly sums,” as one person puts it. (Not incidentally, that might be where Mnuchin got to know Tom Barrack, the prominent Trump supporter who runs Colony Capital, who also made a good deal of his early money in the RTC days.)

Mnuchin was regarded as a protégé of Mike Mortara, the legendary Salomon Brothers mortgage trader who also left Salomon for Goldman in 1987. Mnuchin made partner in 1994, and that year, when Mortara was promoted to be co-head of the fixed income business at Goldman, Mnuchin became the head of the mortgage department.

Mnuchin would end up spending 17 years at Goldman. He was, in old school Goldman lingo, a “culture carrier,” meaning someone who cared deeply about culture issues, instead of just being a commercial animal who was out for the kill. He was also viewed as being very political, with a skill for managing up.

“Steven can get things done,” says one person. “He has always surrounded himself with smart people,” says another. “He builds a good team.”

Blankfein, Thain and Goldman’s Game of Thrones

But as politically savvy as Mnuchin was, former co-workers say he ended up on the wrong side of the Game of Thrones inside Goldman. Mortara lost out to a rising star named Lloyd Blankfein and as Blankfein gained power, he began to eliminate everyone who was close to Mortara. Many of those who weren’t eliminated left, because, as one puts it, “Lloyd would never trust us.”

In 1999, Mnuchin became the firm’s chief information officer, which meant, although he joined then-CEO Hank Paulson in the executive suite and reported directly to him, that he had lost commercial clout. Mnuchin, says one person, was also close to John Thain, but Thain lost out to Blankfein too. In 2002, which was the year that Blankfein was put in charge of the equities business in addition to fixed income, Mnuchin left. (A source close to Mnuchin says that it’s not the case that he lost clout, and that Paulson offered Mnuchin additional responsibilities if he would stay on.)

Goldman Sachs CEO Lloyd Blankfein

Mnuchin worked with Lampert and George Soros, and then, in 2004, started his own firm, Dune Capital, with several other former Goldman partners. One former investor says that Dune’s performance was disappointing. When the financial crisis hit, the fund locked up some of investors’ money that was in illiquid assets (as did many other funds) and it took years to get it back. Barney Keller, a spokesperson for Mnuchin, says that Dune Capital exceeded expectations under Mnuchin’s leadership, and that there was not a lock up.

“Dune Capital decided to return capital in certain funds prior to the financial crisis aside from a few illiquid assets that it decided was in the best interests of the investors to hold,” he says. “Those investments performed very well, and all of the capital was subsequently returned.”

But Mnuchin moved on. In December 2008, he put together a group including John Paulson, George Soros, Chris Flowers, and raised $1.55 billion to acquire IndyMac from the FDIC, getting an agreement from the FDIC that it would absorb some of the losses on a portion of the loan portfolio. (Such agreements are quite common: The FDIC notes that of the more than 500 failures in the financial crisis, loss sharing agreements were used in resolving roughly 60% of them.) Mnuchin became the chairman and CEO of the firm, which they renamed OneWest.

CIT Group CEO John Thain, left, and OneWest CEO Joseph Otting

In a now infamous episode, protestors who complained that OneWest was overly eager to foreclose showed up at Mnuchin’s Bel Air mansion in 2011. His team rebuilt the business under the name OneWest, and in 2014 sold it to CIT, where John Thain had taken over as CEO in 2010, for $3.4 billion. According to the Wall Street Journal, Mnuchin’s take was several hundred million dollars. (Thain stepped down in 2015.) To date, total losses to the FDIC under the loss sharing agreement have been $4.6 billion. The FDIC estimates that its total losses on IndyMac will be $12.4 billion.

A Contrarian Trade

One thing Mnuchin clearly is not is an ideologue. Although he told the Wall Street Journal that he has been a registered Republican “for as long as I can remember,” he is, like many Wall Streeters, fiscally conservative and socially liberal, according to those who know him. He also donated roughly $7,000 since 2000 to Democrat Hillary Clinton’s campaigns, and has donated to the campaigns of Democrats Barack Obama, John Edwards, John Kerry and Al Gore.

Last spring, he shocked those who knew him when he announced he would be Trump’s national finance chairman. He told Bloomberg that “nobody’s going to be like, ‘Well, why did he do this?’ if I end up in the administration.” It was a classic great contrarian trade.

To Mnuchin’s detractors, all of this, plus his lack of policy experience—he is not even an economist!— is horrible, particularly in this time of crisis for capitalism and globalization, which at the least need a rethink. And it might be truly horrible. Like his boss, he is a cipher when it comes to policy. What little he has said about tax policy doesn’t line up with what Trump has said. He talked to CNBC about reforming Dodd Frank, but he used the word “complicated” more than he did propose anything specific. Shares of Fannie and Freddie have soared on his comments to Fox News that the GSEs needed to be released from government control, but he didn’t say anything about whether that would be as purely private companies, or as something akin to their old structure. Between those two ideas lies enormous open ground.

Steve Mnuchin

To give Mnuchin some credit, each one of these topics could be a book. They are not two minute sound bites. And on each one, his ideas could be constructive, not destructive. Community banks do need relief from Dodd Frank. The Volcker rule is too complicated. (Let’s have the old Glass Steagall instead!) Fannie and Freddie do need to be fixed. We do need tax reform. Like his boss, we are going to have to watch what Mnuchin does, not what he says. And if he is a guy who can get stuff done, stuff that is worth doing, well, more power to him.

There’s another way to look on the bright side. Mnuchin is not naïve. He’s seen firsthand the mistakes the government makes that enables private market participants to make billions. If he wants to guard the hens, he knows how, which a wonky economist type would not. He’s got plenty of his own money, so he’s not looking to do favors to the players in hopes that they’ll offer him a job when he leaves. On the policy front, if he’s willing to take advice, then he can get advice.